Low Oil Leads to Slower Home Sales: CREA

Slower Home Sales

Oil’s bottom-barrel pricing is starting to make its mark on the Canadian housing market. The Canadian Real Estate Association’s January numbers show home prices are down 3.3 per cent nation-wide. And it comes as no surprise that the greatest sales slump is in Canada’s most energy-reliant regions; with Calgary and Edmonton’s markets stripped out of the findings, overall prices would actually be up slightly at 1.9 per cent. The latest numbers from the Calgary Real Estate Association shows the short term fallout to be significant, with sales down 37.1 per cent in the city year over year. TD forecasts as much as a 50 per cent decline for 2015 in the Calgary market.

Will oil’s slide lead to the end of real estate’s spectacular 10-year bull run? Or are these temporary side effects of a sector-specific issue?

Downfall of the Petro Dollar?

It’s no secret Canada is a resource-rich economy. Much of the performance of the Toronto Stock Exchange depends heavily on oil and gas prices. Our dollar is often referred to as the “petro dollar”. With prices dropping a stunning 56 per cent in just six months, oil companies have been forced to cut jobs and lay off workers. Cenovus Energy,  the fourth-largest Canadian oil producer, recently announced it will cut staff by 15 per cent and freeze wages this year because of the global slump in oil prices. With job losses comes loss in consumer confidence and that can lead to real estate sales and prices softening.

A Seller’s Panic?

It can’t be easy to be a Calgary or Edmonton-based seller right now. Several of the latest reports call for an Albertan economic downturn. Last week, CIBC forecasted a “mild recession” to hit wild rose country, and that investors should prepare for two quarters of negative growth. Recent data from the Conference Board of Canada’s Winter 2015 Provincial Outlook calls for a 1.5 per cent contraction to Albertan GDP, to last until late 2015 or 2016.

“The party appears to be over in Alberta, at least over the medium term, as low oil prices send chills through the economy,” said Marie-Christine Bernard, Associate Director, Provincial Forecast. “Several oil-industry firms have already announced sharp reductions to their capital plans and to employment. “In the next couple of years, a return to 4 per cent-plus growth is not in the cards, since oil prices will not hit triple-digits any time soon under current market conditions.”

However, while sales drop, Albertan prices remain high, up by 7 per cent in Calgary. The fear is that momentum will slow, causing home prices to fall year over year. As a result, employees losing their jobs and homeowners fearing a price slowdown may panic and sell their properties.

No Cause for Canada-Wide Concern

Worried homeowners are best to look back before panicking about the future. As I’ve written before, home prices in some major centres have experienced incredible gains fueled by low interest rates. From a pure investment perspective, those owning real estate have seen great returns over the last 10 years.

Any softening of housing prices could also present a long-awaited opportunity for many sidelined would-be buyers. But, be warned – if oil prices slide lower, there could be more job losses facing Canadians. The Bank could also respond with yet another central rate cut, which would in turn drive demand and prices back up. Remember the golden rule when shopping for a home: ensure you have the ability to pay your mortgage at 2 to 3 percentage points above what your bank offer. This will ensure you are able to afford your home despite where home prices go.

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Related Topics

Economic News / Mortgage News / Mortgages

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